The President’s fiscal year 2017 budget proposal includes a capon tax-deferred retirement account assets of $3.4 million.

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Read: Obama seeks to expand 401(k) use by lettingemployers pool plans

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That proposal was first floated in President Obama’s fiscal 2014budget, and has been advanced in every budget since, gaining littletraction in Congress each year.

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In this year’s budget, theWhite House rationalized the proposed cap by arguing that existingdeferral limits to defined contribution plans and IRAs do not“adequately limit” the amount of tax-favored savings investors cansock away.

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“Such accumulations can be considerably in excess of amountsneeded to fund reasonable levels of consumption in retirement andare well beyond the level of accumulation that justifiestax-advantaged treatment of retirement savings accounts,” accordingto in the 2017 budget.

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Savers with tax-deferred account assets above the $3.4 millioncap—the budget proposes combining assets in individuals’ DC, DB ,and IRA accounts to determine if they reach the limit—are adding tothe country’s deficit, implies the proposal.

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Read: Make 401(k)s a perfect gift foremployees

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By capping savings, the tax system would be made moreprogressive, “and still provide substantial tax incentives forreasonable levels of retirement saving,” says the White House’sproposal.

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How likely is it that Congress will sign off on account caps?Not very, if previous attempts at caps are any indication.

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Still, the proposal begs the question as to how many Americanswould be impacted.

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In 2013, on the heels of the cap’s first appearance in a budgetproposal, Jack VanDerhei, director of research at the EmployeeBenefits Research Institute, set out to answer that question.

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As in this year’s budget, that proposal capped aggregatedaccounts at $3.4 million, a rate pegged to the annual annuity limiton tax-qualified defined benefit distributions (it was $205,000 in2013, and is now $210,000).

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VanDerhei and EBRI’s analysis in 2013 showed a minusculepercentage of participants in 401(k) plans had combined accountbalances rich enough to be immediately affected by a $3.4 millioncap.

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But when accounting for fluctuating discount rates, whichdetermine the defined benefit annuity caps, and considering the ageof savers, VanDerhei’s analysis showed that the effects of a capwould ultimately be significant.

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At a historically low discount rate of 4 percent, more than onein 10 401(k) participants would likely hit the proposed cap beforeretirement age—and that’s not accounting for any defined benefitsavings participants may have.

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But in the event that discount rates revert to historicallynormal levels, the actuarial effect would be to lower the caplevel, exposing far more savers to its limits.

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At an effective interest rate of 6 percent, the cap limit dropsto $2.7 million, and at 8 percent, it drops to $2.3 million,according to VanDerhei’s analysis (it can be found here).

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Should interest rates return to 8 percent, somewhere between 20and 30 percent of 401(k) participants would be expected to beimpacted by the cap.

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The 2017 budget proposal says themaximum account level would be adjusted for inflation increases,but it makes no mention rising interest rates’ affect on caplevels.

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This year’s proposal does address the impact of a savings cap onsponsors’ annual reporting requirements, suggesting,“simplifications would be considered in order to easeadministration.”

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In VanDerhei’s analysis, a cap could create a savings culturewhere participants and sponsors are routinely required to suspenddeferrals.

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That could negatively impact younger participants’ savinghabits, and potentially create more regulatory roadblocks forsmaller employers, according to VanDerhei’s analysis.

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Mike McNamee, chief public communications officer at theInvestment Company Institute, fears a cap would have unintendedconsequences on both participants and sponsors.

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“This approach is overly complicated and extremely difficult forbusinesses and families to track,” said McNamee in an email.

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“Under this proposal, fluctuating interest rates or marketreturns could temporarily push an individual’s total accumulationsover the limit in a given year—forcing the saver to stop saving forsome time and restart later,” he added.

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That type of “stop and go” retirement system would penalizeworkers that have taken the responsibility to save over the longterm, said McNamee.

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